Thematic evaluation
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Medtronic Plc (MDT)

September 27, 2024

Compared to: Edwards Lifesciences Corp. (EW) | Abbott Laboratories (ABT) | Health Care Select Sector SPDR Fund (XLV)

Our reasoning

Medtronic's current valuation appears fair, balancing its strong market position and growth prospects against ongoing challenges. The company's revenue growth and new product successes are offset by margin pressures and declining returns on assets and equity. While there are potential catalysts for upside, the risks from supply chain issues, increasing costs, and regulatory challenges keep the valuation in check.

Key takeaways
  • Medtronic is a leading medical technology company with a strong revenue growth driven by its diverse product portfolio and strategic initiatives.
  • The company is facing challenges in controlling operating expenses and maintaining profitability due to rising costs and supply chain disruptions.
  • The company's liquidity position is decreasing, which could limit its ability to meet short-term obligations.
  • The company's long-term solvency appears to be stable, but its increasing debt levels could pose a risk if profitability continues to decline.
  • The company's asset utilization efficiency is decreasing, indicating a decline in its ability to generate profits from its assets.
  • The company's cash flow from operations is increasing, but the quality of earnings is a concern due to the gap between net income growth and operating cash flow growth.
  • The company's capital allocation strategy is shifting towards a more balanced approach, with a focus on both growth and shareholder returns.
  • The company's future outlook is uncertain due to the ongoing pressure on profitability and the potential for further declines in liquidity.
  • Medtronic's valuation is in line with its peers, but its financial performance and growth prospects are uncertain.
  • The company's stock price has been volatile, but it has generally outperformed EW over the past three years.
  • Investors should carefully consider the risks and opportunities associated with Medtronic before making an investment decision.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • Medtronic Plc is a global leader in medical technology, specializing in device-based medical therapies and services. The company operates through four segments: Cardiovascular Portfolio, Neuroscience Portfolio, Medical Surgical Portfolio, and Diabetes Operating Unit.
    • Medtronic's product portfolio includes a wide range of devices and therapies for treating cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions, chronic pain, urological/digestive disorders, ear/nose/throat conditions, and diabetes.
    • The company's target market includes healthcare systems, clinics, providers, distributors, and institutions, including government programs and group purchasing organizations.
    • Medtronic faces competition from large manufacturers like Abbott Laboratories and Johnson & Johnson, as well as smaller specialized competitors and providers of alternative medical therapies like pharmaceuticals.
    • For comparative analysis, we will be using the Health Care Select Sector SPDR Fund (XLV) as a benchmark and Edwards Lifesciences Corp. (EW) and Abbott Laboratories (ABT) as industry peers.

  2. Financial Performance:

    • Medtronic has demonstrated consistent revenue growth over the past three years, driven by strong performance across most business segments, particularly Diabetes, Neuromodulation, and Cardiac Rhythm & Heart Failure.
    • Profitability has been impacted by rising costs from inflation, supply chain challenges, and Italian payback accruals.
    • The company's gross profit margin has been declining, but it has been able to offset some of the impact of inflation through pricing and cost-out programs.
    • The company's operating margin has also been declining, but it has been able to improve its operating margin on a constant currency basis.
    • Medtronic's return on assets (ROA) and return on equity (ROE) have been declining, indicating a decrease in asset utilization efficiency.
    • Compared to its peers, Medtronic has generally outperformed EW in terms of revenue growth and profitability, but it has underperformed ABT in the longer-term periods.

  3. Operational Efficiency:

    • Medtronic's working capital has been increasing, indicating potential inefficiencies in managing its current assets and liabilities.
    • The company's cash flow from operations has been increasing, indicating strong underlying business performance.
    • Capital expenditures have been increasing, indicating investments in growth initiatives or new product launches.
    • The company's free cash flow has been growing, providing the company with the financial flexibility to fund future investments and shareholder returns.
    • Medtronic's asset quality appears to be declining, as evidenced by the declining ROA and ROE.
    • The company's dividend payments have been increasing, suggesting a focus on shareholder returns.
    • Medtronic's short-term liquidity position appears to be stable, as evidenced by the increasing operating cash flow and the current ratio.
    • The company's long-term solvency appears to be stable, as evidenced by the increasing long-term debt and the overall stable debt-to-equity ratio.
    • Compared to its peers, Medtronic has a lower debt-to-equity ratio than EW, but a higher debt-to-equity ratio than ABT.

  4. Growth Opportunities:

    • Medtronic is pursuing growth opportunities through market expansion, strategic acquisitions, and R&D investments.
    • The company is expanding its presence in emerging markets, particularly in Asia and Latin America.
    • Medtronic has a strong track record of successful acquisitions, and it is actively seeking opportunities to expand its product portfolio and enter new markets.
    • The company has a robust R&D pipeline, and it is investing heavily in developing new technologies and therapies.
    • Medtronic is focused on driving scale across its manufacturing, technology, and commercial organizations, as well as making progress on its ongoing portfolio management work.
    • The company's strategic partnership with Abbott to integrate its CGM technology with Medtronic's AID and smart MDI systems is a significant move to strengthen its Diabetes franchise and expand patient access.

  5. Risks and Threats:

    • Medtronic faces a number of risks, including intense competition, regulatory risks, supply chain disruptions, intellectual property litigation, cybersecurity threats, and global macroeconomic/geopolitical factors.
    • The company's profitability is under pressure from rising costs and supply chain disruptions.
    • Medtronic's liquidity position is decreasing, which could limit its ability to meet short-term obligations.
    • The company's increasing debt levels could pose a risk if profitability continues to decline.
    • The company's net income growth is outpacing operating cash flow growth, which could be a red flag. This suggests that the company may be relying on non-cash items or aggressive accounting practices to boost earnings.

  6. Valuation Analysis:

    • Medtronic's valuation metrics, such as its P/E ratio and EV/EBITDA ratio, are in line with its peers.
    • The company's valuation is expected to be impacted by its ongoing investments in growth initiatives and the pressure on profitability.
    • Potential catalysts for Medtronic's stock price include new product launches, successful acquisitions, and improved profitability.

  7. Price Performance:

    • Medtronic's stock price has generally outperformed EW over the past three years, but it has underperformed ABT in the longer-term periods.
    • Medtronic's stock price has been more volatile than ABT's, but less volatile than EW's.
    • Medtronic's beta suggests that it is less sensitive to market movements than EW but more sensitive than ABT.

  8. Future Outlook:

    • Medtronic's future outlook is uncertain due to the ongoing pressure on profitability and the potential for further declines in liquidity.
    • The company's financial flexibility could be constrained if the liquidity position continues to decline.
    • The company's cash flows are expected to continue to be impacted by the ongoing investments in growth initiatives and the pressure on profitability.
    • The company's free cash flow is expected to continue to grow, providing the company with the financial flexibility to fund future investments and shareholder returns.
    • Future revenue growth is expected to be in the mid-single-digit range.
    • Profitability margins are expected to remain under pressure due to rising costs.

  9. Summary:

    • Medtronic is a leading medical technology company with a strong revenue growth driven by its diverse product portfolio and strategic initiatives.
    • The company is facing challenges in controlling operating expenses and maintaining profitability due to rising costs and supply chain disruptions.
    • The company's liquidity position is decreasing, which could limit its ability to meet short-term obligations.
    • The company's long-term solvency appears to be stable, but its increasing debt levels could pose a risk if profitability continues to decline.
    • The company's asset utilization efficiency is decreasing, indicating a decline in its ability to generate profits from its assets.
    • The company's cash flow from operations is increasing, but the quality of earnings is a concern due to the gap between net income growth and operating cash flow growth.
    • The company's capital allocation strategy is shifting towards a more balanced approach, with a focus on both growth and shareholder returns.
    • The company's future outlook is uncertain due to the ongoing pressure on profitability and the potential for further declines in liquidity.
    • Medtronic's valuation is in line with its peers, but its financial performance and growth prospects are uncertain.
    • The company's stock price has been volatile, but it has generally outperformed EW over the past three years.
    • Investors should carefully consider the risks and opportunities associated with Medtronic before making an investment decision.
Peer fundamentals 
Fundamentals
Insights
  • Medtronic is a leading medical technology company with a strong revenue growth driven by its diverse product portfolio and strategic initiatives.
  • The company is facing challenges in controlling operating expenses and maintaining profitability due to rising costs and supply chain disruptions.
  • The company's liquidity position is decreasing, which could limit its ability to meet short-term obligations.
  • The company's long-term solvency appears to be stable, but its increasing debt levels could pose a risk if profitability continues to decline.
  • The company's asset utilization efficiency is decreasing, indicating a decline in its ability to generate profits from its assets.
  • The company's cash flow from operations is increasing, but the quality of earnings is a concern due to the gap between net income growth and operating cash flow growth.
  • The company's capital allocation strategy is shifting towards a more balanced approach, with a focus on both growth and shareholder returns.
  • The company's future outlook is uncertain due to the ongoing pressure on profitability and the potential for further declines in liquidity.
Analysis
  • Revenue - Revenue growth is positive and driven by strong performance across most business segments, particularly Diabetes, Neuromodulation, and Cardiac Rhythm & Heart Failure. - The company is facing intense competition and a complex, evolving regulatory environment, but has demonstrated the ability to navigate these challenges and drive growth through new product launches, strategic acquisitions, and geographic expansion.
    • Profitability
      • Profitability is decreasing due to rising costs from inflation, supply chain challenges, and Italian payback accruals.
      • The company is struggling to control operating expenses in relation to revenue growth.
      • The company's asset utilization efficiency is decreasing, as evidenced by the declining return on assets and return on equity.
    • Liquidity
      • The company's liquidity position appears to be decreasing, as evidenced by the decline in cash and short-term investments.
      • The company's short-term liquidity position appears to be stable, as evidenced by the increasing operating cash flow and the current ratio.
    • Solvency
      • The company's long-term solvency appears to be stable, as evidenced by the increasing long-term debt and the overall stable debt-to-equity ratio.
      • The company's financial leverage is increasing, as evidenced by the increasing debt-to-equity ratio. However, the company's debt-to-EBITDA ratio is below the industry average, suggesting that the company's debt levels are manageable.
    • Operational Efficiency
      • The company's asset utilization efficiency is decreasing, as evidenced by the declining return on assets and return on equity. This could be a result of the company's investments in fixed assets and the increasing costs.
    • Cash Flow Analysis
      • Cash flows from core business operations are increasing, indicating strong underlying business performance.
      • Capital expenditures are increasing, indicating investments in growth initiatives or new product launches.
      • The company is reducing its reliance on debt financing, while increasing dividend payments, suggesting a focus on shareholder returns.
      • The company's net income growth is outpacing operating cash flow growth, which could be a red flag. This suggests that the company may be relying on non-cash items or aggressive accounting practices to boost earnings.
    • Risk Factors
      • The declining liquidity position and asset utilization efficiency are potential red flags.
      • The increasing debt levels could also pose a risk if the company's profitability continues to decline.
      • The company's net income growth is outpacing operating cash flow growth, which could be a red flag. This suggests that the company may be relying on non-cash items or aggressive accounting practices to boost earnings.
    • Future Outlook
      • The company's balance sheet is expected to continue to be impacted by the ongoing investments in growth initiatives and the pressure on profitability.
      • The company's financial flexibility could be constrained if the liquidity position continues to decline.
      • The company's cash flows are expected to continue to be impacted by the ongoing investments in growth initiatives and the pressure on profitability.
      • The company's free cash flow is expected to continue to grow, providing the company with the financial flexibility to fund future investments and shareholder returns.
      • Future revenue growth is expected to be in the mid-single-digit range.
      • Profitability margins are expected to remain under pressure due to rising costs.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-23)
Health Care Select Sector SPDR Fund (XLV)
  • Performance Comparison:
    • MDT has underperformed XLV over most of the historical periods analyzed, particularly in the longer timeframes. This suggests that MDT has struggled to keep pace with the broader healthcare sector.
    • The only periods where MDT outperformed XLV were in the shorter timeframes, such as the 1-week, 1-month, and 3-month periods. This could be attributed to short-term market fluctuations or specific events affecting MDT's stock price.
    • Overall, MDT's performance has been less consistent than XLV's, indicating a higher level of volatility and risk.
  • Risk and Return Analysis:
    • MDT has consistently provided lower annualized returns than XLV over the past three years. This suggests that MDT has not been as profitable as the broader healthcare sector.
    • MDT has also exhibited higher annualized volatility than XLV, indicating that MDT is a riskier investment.
    • The drawdown figures from previous peaks show that MDT has experienced significantly larger drawdowns than XLV. This further reinforces the notion that MDT is a more volatile and riskier investment.
  • Risk-Adjusted Performance:
    • XLV has consistently offered a better risk-adjusted return than MDT, as evidenced by its higher Sharpe ratio. This suggests that XLV has been more efficient in generating returns relative to its risk.
    • MDT's beta values indicate that it is less volatile than the overall market. However, MDT's beta values have been slightly higher than XLV's, suggesting that MDT is slightly riskier than XLV.
  • Overall Assessment:
    • MDT has underperformed XLV in terms of both absolute and risk-adjusted returns over the past three years. This suggests that MDT has not been as profitable or efficient as the broader healthcare sector.
    • MDT has also exhibited higher volatility and larger drawdowns than XLV, indicating that it is a riskier investment.
    • While MDT's beta values suggest that it is less volatile than the overall market, its higher beta compared to XLV indicates that it is still slightly riskier than the benchmark.
    • Investors seeking a more stable and less volatile investment within the healthcare sector may find XLV a more attractive option. However, investors with a higher risk tolerance and a longer investment horizon may consider MDT, as it has the potential for higher returns, albeit with greater risk.
Peers Price History(as of 2024-09-23)
Edwards Lifesciences Corp. (EW)Abbott Laboratories (ABT)
  • Performance Comparison:
    • MDT has generally outperformed EW over the past three years, particularly in the short-term periods (YTD, 1 Week, 1 Month, 3 Months, and 6 Months). However, MDT has underperformed ABT in the longer-term periods (1 Year, 2 Years, and 3 Years).
    • MDT's performance has been more consistent relative to EW, which has experienced significant volatility and drawdowns. ABT has shown more consistent performance than MDT, but MDT has outperformed ABT in the short-term.
  • Risk and Return Analysis:
    • MDT has provided higher annualized returns than EW over the past three years, but it has underperformed ABT in the longer-term periods.
    • MDT has been less volatile than EW but more volatile than ABT. EW has consistently exhibited the highest volatility, while ABT has been the least volatile.
    • MDT's maximum drawdown of 45.1% is smaller than EW's 54.32% but larger than ABT's 33.88%. This suggests that MDT's risk profile is somewhere between EW and ABT.
  • Risk-Adjusted Performance:
    • EW has consistently offered a better risk-adjusted return than MDT and ABT, as indicated by its higher Sharpe ratio.
    • MDT's beta suggests that it is less sensitive to market movements than EW but more sensitive than ABT.
  • Overall Assessment:
    • MDT has generally outperformed EW in terms of returns, but it has been more volatile and has experienced larger drawdowns. ABT has consistently shown more stable performance and lower volatility, but it has also provided lower returns than MDT in the short-term.
    • EW's higher volatility and drawdowns, despite its better risk-adjusted returns, may make it a less attractive investment for risk-averse investors.
    • MDT's performance has been more consistent than EW's, but its higher volatility and drawdowns compared to ABT may make it a less attractive investment for investors seeking lower risk.
    • ABT's lower volatility and smaller drawdowns make it a more attractive investment for risk-averse investors, but its lower returns compared to MDT in the short-term may be a concern for investors seeking higher returns.
    • The recent trends suggest that EW's volatility and drawdowns have increased, while MDT's volatility has remained relatively stable. ABT's volatility has been lower than MDT's, but its returns have also been lower.
    • Investors should carefully consider their risk tolerance and investment goals when making investment decisions regarding MDT, EW, and ABT.
Peers Fundamentals(as of 2024-07-31)
Edwards Lifesciences Corp. (EW)Abbott Laboratories (ABT)

  1. Market Position and Size:

    • MDT is the second-largest company in the peer group, with a market cap significantly larger than EW but smaller than ABT.
    • MDT's market cap is generally aligned with its financial performance relative to its peers, with higher revenue, EBITDA, and Net Income than EW but lower than ABT.

  2. Profitability and Efficiency:

    • MDT demonstrates strong profitability, exceeding industry averages but falling short of EW's performance.
    • MDT's Gross Profit Margin, EBITDA Margin, and Net Profit Margin are higher than ABT's but lower than EW's.
    • MDT's returns on assets, equity, and capital are significantly lower than EW's, suggesting that EW is more efficient in generating returns.

  3. Financial Health and Stability:

    • MDT's liquidity position is relatively strong, but its high debt levels raise concerns about its financial stability.
    • MDT's Current Ratio and Quick Ratio are above industry averages, indicating strong liquidity.
    • MDT's Total Debt to Total Equity Ratio and Debt / EBITDA are significantly higher than its peers, indicating a more leveraged capital structure.

  4. Valuation and Market Perception:

    • MDT's valuation is relatively attractive compared to its peers and industry averages, potentially reflecting its strong profitability and cash flow generation.
    • MDT's Enterprise Value To Sales, Enterprise Value To EBITDA, Price To Earnings, Price to Book Ratio, and Price To Sales Ratio are lower than its peers, suggesting that the market is valuing it at a discount.

  5. Cash Flow and Capital Management:

    • MDT demonstrates solid cash flow generation capabilities, exceeding EW's performance but lagging behind ABT's.
    • MDT's Free Cash Flow and Free Cash Flow Margin are consistently higher than the peer group average, indicating its strong ability to generate cash from operations.

  6. Growth and Future Prospects:

    • MDT's growth rates have been consistently decreasing over the past few years, particularly in sales, EBITDA, and net income.
    • MDT's growth is concentrated in Free Cash Flow and Free Cash Flow Margin, while other key metrics are showing deceleration.
    • This suggests that MDT may be facing challenges in translating revenue growth into profit growth.

  7. Potential for Investment:

    • MDT presents a mixed investment proposition. Its strong profitability, cash flow generation, and large market presence are attractive features.
    • However, its decelerating growth rates and high debt levels are potential risks that could limit its future upside potential.

  8. Key Risks and Considerations:

    • Decelerating growth rates: MDT's growth rates have been consistently decreasing over the past few years, particularly in sales, EBITDA, and net income.
    • High debt levels: MDT's Total Debt to Total Equity Ratio and Debt / EBITDA are significantly higher than its peers, raising concerns about its financial stability.
    • Lower returns on capital: MDT's returns on assets, equity, and capital are significantly lower than EW's, suggesting that EW is more efficient in generating returns.

  9. Overall Assessment:

    • MDT is a financially sound company with strong profitability and cash flow generation. However, its high debt levels and decelerating growth rates are potential concerns that could impact its future performance. Overall, MDT's financial position is strong, but its growth prospects are uncertain.